Best ETF Strategies for 2014 - ETF News And Commentary

By: Zacks.com

Posted: 1/7/2014 8:04:00 AM

Referenced Stocks: BFOR;DBGR;DXJ;EWW;EWY

US stocks had a spectacular run in 2013-delivering their best
annual performance in more than a decade. At current levels, stocks
are not cheap but they are not too expensive either. An improving
economy, receding fiscal drag and an accommodative monetary policy
should support further gains in stocks though gains will most
likely be nowhere close to last year's. (Read:
3 Hot Sector ETFs for 2014
)

The Fed starts 'tapering' its asset purchase program this month and
may announce further reductions at a "measured pace" this year if
the economy and the labor market continue to improve.

With interest rates on the rise, the three decade long bull market
for bonds has come to an end. The US bond market as measured by the
Barclays US Aggregate Bond Total Return Index had a 2% decline in
2013. The losses may accelerate this year, particularly for long
term treasury and mortgage bonds.

As we head into 2014, it may be a good time to look at your
portfolio and realign it according to the changing investment
landscape. (Read:
3 Best Dividend ETFs of 2013
)

Top Sectors for 2014

Sectors like Technology, Industrials and Financials outperform in
the improving economic and rising rate environment. Technology
sector has remained mostly out of favor with investors last year
due to several industry-specific issues and less-than supportive
global macroeconomic environment. At current valuations, the sector
looks attractive. Continued pick-up in the manufacturing activity
bodes well for Industrials.

Among Financials, Banks-Regional Banks in particular-benefit from
the steepening yield curve while Insurance companies benefit from
rising rates as well as brightening economic picture. Consumer
discretionary stocks had an excellent run in 2013 but they may
continue their uptrend if the job market continues to heal. (Read:
Follow Warren Buffett in 2014 with these sector
ETFs
)

On the other hand, bond-like sectors including Utilities, Telecom
and REITs will suffer setbacks if interest rates continue to rise.

Recovery in Europe and Japan may gain Traction

The Euro-zone is slowly coming out of its long recession, and
though the recovery may gain further momentum in 2014, it may still
remain imbalanced between different members. Germany, Ireland,
Italy and Spain look better positioned as of now in addition to UK
and Sweden outside the zone.

After a massive surge in early 2013 and a rather moderate
performance in the second half of the year, Japan hedged ETFs may
be ready for the second phase of their bull-run this year. (See: J
apan ETFs-One year after Abenomics
)

Emerging Markets ETFs had a rough time in 2013 mainly due to rising
worries about the end of the era of cheap money. Though most of
these markets look attractive in terms of valuation now, investors
will need to take a hard look at macroeconomic fundamentals as well
as political situation in these countries before deciding to
invest. (Read:
3 Emerging Market ETFs to watch for Political
Issues
)

Emerging markets that depend on external capital flows to finance
their wide current account deficits like Indonesia, Brazil, Turkey,
India and South Africa remain vulnerable to QE 'tapering'. Further,
all these five countries will hold general elections this year,
leading to higher volatility. Ongoing political unrest in some of
emerging countries will continue to cause turmoil in the markets.

On the other hand countries like Mexico (
EWW
), South Korea (EWY) and Taiwan look attractive not only due to
their sound macroeconomic fundamentals and lower dependence on
'hot' money but also since these countries will benefit a lot from
the economic pick-up in the US. (Read:
Will Mexico ETF Shine in 2014?
)

Some of these strategies may continue to reward investors in 2014.
US companies have been buying back their stocks at a record pace.
Per S&P, share repurchases increased to $128.2 billion during
Q3 2013, up 8.6% from Q2 and up 23.6% from Q3 of 2012.

With record amount of cash on their balance sheets, US companies
may continue to increase their share repurchases in the months to
come and PowerShares Buyback ETF (
PKW
) remains a solid pick for 2014.

I also expect that only "high-quality" stocks will outperform as
the QE support is slowly withdrawn by the Fed. Investor could take
a look at iShares MSCI US Quality Factor ETF (
QUAL
) and Barron's 400 ETF (
BFOR
) for getting exposure to a diversified basket of companies with
solid fundamentals.